9 Feb, 21
Ethereum Settlement for the Digital Dollar
The United States Office of the Comptroller of the Currency recently permitted banks to utilise stablecoins, meaning traditional financial institutions could use them to facilitate payments and remittances. Jerome Powell, the chair of the Federal Reserve, estimates it will take “years rather than months” before the Fed releases a CBDC for the US dollar. This means Ethereum settlement is the current de facto settlement layer for the digital dollar.
As a refresher, USD-backed stablecoins are minted onto blockchains by an institution like Coinbase, backed 1:1 with USD held in their banks. These stablecoins, used for global low-cost and instant remittances as compared to SWIFT, are stores of value, applied to earn yield in DeFi and extensively used in trading.
Compared to using SWIFT or international wires, which charges you anywhere from $15 to $50 for a simple transaction that takes a few business days to clear, stablecoins on Ethereum are cheaper and offer instantaneous settlement. No waiting for 2-3 business days, as it should be in the digital age.
Store of value
Countries like Argentina, Venezuela and Zimbabwe suffer from hyperinflation. Having accessibility to a digital dollar instead of the Venezuelan bolívar would allow Venezuelans to escape harmful monetary policy and have a proper medium of exchange. Our research analyst, Victor, has written more on this.
Earning yield in DeFi
Money markets in DeFi such as AAVE or Compound utilise stablecoins for borrowing and lending. Due to the lack of intermediaries in DeFi, demand for leverage in this speculative period and yield opportunities in crypto, current lending rates for stablecoins are as high as 15%.
Use in trading
USDT is extensively used in trading on crypto-exchanges such as Binance. Due to the ban on trading cryptocurrencies in China, the Chinese Yuan is absent in crypto markets. How the Chinese market accesses cryptocurrency trading is through USDT; anonymous OTC dealers help customers convert Yuan to USDT, which is then transferable to crypto exchanges to trade for other assets. USDT is also often used as collateral for perpetual futures funding among a popular number of exchanges.
Rise of stablecoins, currently the closest to a digital dollar
The March 2020 liquidity crisis sparked a booming growth for the stablecoin industry. There was a global shortage of U.S Dollars during this time, as investors flock to USD as a safe store of value. Demand for stablecoins shot up, with prices trading at a premium over 1 USD. This opened up arbitrage opportunities for stablecoin issuers. By minting stablecoins at the cost of $1, they were able to sell it on the crypto market for a higher price. Since then, the total supply of stablecoins grew from over $5 billion to over $35 billion as of 1st February.
As of today, there are over $25b worth of stablecoins issued on Ethereum settlement, taking the lion’s share of all stablecoin issuance.
As mentioned, these stablecoins are used in DeFi money markets, but also trade on other DeFi primitives like decentralised exchanges, asset managers, perpetual futures, options, and more. Usage of the Ethereum settlement network means more demand for ETH settlement due to gas fees, which correlates to price increases for ETH. Generated fees on Ethereum has greatly surpassed 2018 levels, when the all-time high for ETH was around $1400. Currently, the price of ETH sits at $1500, meaning that the asset may be highly undervalued in relation to its past.
Ethereum Settlement for the Digital Dollar – Conclusion
With USD CBDCs being a few years away, Ethereum will be the de facto settlement layer for the digital dollar. However, Ethereum settlement encompasses more than just the use of stablecoins. Other assets such as tokenised stocks, bonds, real estate and derivatives are being introduced into the ecosystem, creating opportunities for growth. Demand for ETH goes up as it is required for usage of the network. Therefore, it may be wise to consider the predominant global settlement layer as an ETF of blockchain finance.
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